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Gran Tierra Starts 2016 Exploration Program as Oil Prices Rebound

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Gran Tierra Energy Inc. announced its financial and operating results for the quarter ended June 30, 2016.  (All dollar amounts are in United States dollars unless otherwise indicated.)

Second quarter 2016 highlights:

Production:

• Commenced our 2016 exploration program with ongoing civil work activities on the PUT-7 block.
• Working interest production before royalties for the quarter averaged 25,744 barrels of oil equivalent per day, or 21,695 BOEPD net after royalty, compared with 25,610 BOEPD WI before royalties and 22,788 BOEPD NAR in the first quarter of 2016.
• Sales volumes for the quarter were 22,418 BOEPD compared with 25,430 BOEPD in the Prior Quarter. Sales volumes decreased due to the effect of inventory changes (1,919 BOEPD) and higher royalty volumes (1,227 BOEPD), partially offset by higher working interest production (134 BOEPD).
• Gran Tierra continues to expect 2016 production to average between 27,500 and 29,000 BOEPD WI before royalties, however, with the deferral of workovers and performance of its non-operated production, the Company expects to be at the lower end of the range.

Financial and Operational:

• Net cash provided by operating activities for the quarter was $27.4 million compared with $10.8 million in the Prior Quarter.
• Funds flow from operations for the quarter was $33.8 million compared with $11.6 million in the Prior Quarter. Funds flow increased due to increased oil and natural gas sales, decreased operating and transportation, general and administrative, severance, equity tax and income tax expenses, and lower realized foreign exchange losses of $0.5 million.
• Net loss for the quarter was $63.6 million, or $0.21 per share basic and diluted, compared with a net loss of $45.0 million, or $0.15 per share basic and diluted, in the Prior Quarter. The loss recorded in the second quarter of 2016 included $61.5 million of non-cash impairment losses, net of income tax recovery, resulting from the continued low commodity price environment.
• The Company maintains a strong balance sheet with cash and cash equivalents (including current restricted cash) of $181.2 million, and working capital (including cash and cash equivalents) of $210.8 million at June 30, 2016.
• Average realized prices increased to $35.15 per barrel of oil equivalent ("BOE") for the quarter compared with $24.81 per BOE in the Prior Quarter, primarily due to higher benchmark oil prices.
• Operating expenses for the quarter increased to $8.70 per BOE from $8.24 per BOE in the Prior Quarter.
• Transportation expenses for the quarter decreased to $3.05 per BOE from $5.33 per BOE in the Prior Quarter. The decrease was primarily due to higher percentage of sales at the wellhead, 48% of production in the quarter compared with 33% in the Prior Quarter, in which transportation expenses are netted from realized price. As a result of favorable marketing contracts, the Company realized overall higher operating netbacks in the quarter.
• G&A expenses for the quarter decreased by 4% compared with the Prior Quarter. The decrease was primarily due to higher allocations to recoveries and capital projects. The Company continues its efforts to reduce costs across the organization.
• On June 30, 2016, Gran Tierra entered into a share purchase agreement to acquire all of the issued and outstanding common shares of PetroLatina Energy Ltd. for cash consideration of $525.0 million, subject to customary working capital and other adjustments. The Acquisition is also subject to customary closing conditions, including, among other things, any required regulatory approval. Approval from the Agencia Nacional de Hidrocarburos (National Hydrocarbon Agency) of Colombia was received on July 29, 2016 and the Acquisition is expected to close prior to August 31, 2016.

Gary Guidry, President and Chief Executive Officer of Gran Tierra, commented, "Gran Tierra's strong results in second quarter 2016 clearly demonstrate that we are well-positioned for ongoing success in Colombia. Our second quarter funds flow from operations increased 192% relative to the first quarter of 2016 to $33.8 million. The strong funds flow generation at an average Brent price of $45.52 per barrel of oil for the quarter is a testament to the quality of our assets and our cost structure. The robust quarterly funds flow was driven in part by a strong rebound in our operating netback, which increased 108% quarter-over-quarter to $23.40 per BOE. During the first half of 2016, Gran Tierra's funds flow from operations of $45.3 million covered 102% of the Company's first half 2016 capital expenditures of $44.6 million. Our second quarter 2016 net cash provided by operating activities was $27.4 million compared with $10.8 million in first quarter 2016.

"We are financially disciplined and returns-driven and, with funds flow from operations matching capital in the first half of the year, we deemed it prudent to defer certain workovers. Whilst working interest production before royalties was up only 1% from the prior quarter, we deferred the majority of our workover program until the second half of 2016 as we anticipate higher commodity prices later in the year. We expect the completion of the workover program plus appraisal activity in Putumayo-7 to allow Gran Tierra to increase production in line with our 2016 production guidance.

"Oil prices rebounded in the second quarter, with Brent prices averaging $45.52 per barrel, a 35% increase from the first quarter of 2016, while Gran Tierra's realized oil price increased 42% to $35.15 per BOE in the same time period. Gran Tierra has successfully driven down combined operating and transportation expenses to $11.75 per BOE in the second quarter, a decrease of 34% from one year ago. We believe our low cost and low decline production allows us to be successful in a variety of pricing environments. With the development programs for both the Costayaco and Moqueta fields completed in second quarter 2016, for the reserves we currently have booked, we expect free cash flow from these two core oil fields to fund our future exploration programs over the next five years.

"We have commenced our 2016 exploration program with ongoing civil work activities on the PUT-7 block. We expect to spud the Cumplidor exploration/appraisal well in the PUT-7 block during third quarter 2016. We expect this well to be followed immediately by the Alpha-1 exploration well from the same drilling pad. These wells are the first to test the N-sands exploration play in PUT-7, which we believe is prospective and is expected to lead to long term reserve and production growth. In addition, we are proceeding with a near field exploration opportunity which is a potential separate pool adjacent to the Costayaco field. Civil works have commenced on an extension of an existing Costayaco lease and we expect this well to be spud in third quarter 2016.

"We are also successfully executing our strategy to pursue new value-added growth opportunities in Colombia, having announced, on July 1, 2016, the planned strategic acquisition of PetroLatina for $525.0 million, subject to customary working capital and other adjustments. The Acquisition represents a unique material opportunity in Colombia in terms of scale and upside potential and would add a new core platform area for Gran Tierra in the prolific Middle Magdalena Basin. The Acquisition is expected to increase Gran Tierra's pro forma December 31, 2015 proved plus probable reserves by 70% to 129 million barrels of oil equivalent. In addition to the 53 MMBOE² of 2P reserves, the Acquisition is expected to add 45 MMBOE² of possible reserves. With our strong technical and operating teams, we expect to be able to convert a portion of these possible reserves into 2P reserves over time. One of the many attractive aspects of the Acquisition is that 89% of the 2P reserves are in the Acordionero field, which is in the Middle Magdalena Basin and is 100% owned and operated by PetroLatina². Following the Acquisition, we expect to operate over 90% of our production and reserves.

"Our strong balance sheet has allowed Gran Tierra to pursue this transformational Acquisition to further expand and diversify our asset base. With $210.8 million of working capital (including cash and cash equivalents) as at June 30, 2016, robust cash flows and an undrawn credit facility, we are well positioned to fund the Acquisition, which is expected to close prior to August 31, 2016, as approval of the Acquisition was received from the ANH on July 29, 2016. The Acquisition is expected to be funded through a combination of our current cash balance, the proceeds of a recently consummated private placement of $173.5 million of subscription receipts, available borrowings under our existing revolving loan credit facility and $130.0 million of borrowings under a new term loan under the credit facility that is contingent upon the closing of the Acquisition. We believe the Acquisition also demonstrates how Gran Tierra can effectively allocate capital to develop and grow reserves and add value. Our team is focused on emerging from the current low oil price environment as one of the strongest and largest independent Colombia-focused exploration and production companies, with a robust portfolio to grow net asset value per share for our stakeholders.

"On behalf of our board of directors and the team at Gran Tierra, I want to thank all of our stakeholders for their continued support during this difficult commodity price environment. We look forward to communicating additional updates in the coming quarters. We believe that Gran Tierra is well positioned for growth in 2016 and beyond."

Second Quarter 2016 Operations

Colombia

Chaza Block, Putumayo Basin (Gran Tierra 100% WI and Operator)

The Company continued its development program in both Costayaco and Moqueta.

Costayaco

During the second quarter, artificial lift was optimized in 6 wells, which resulted in estimated incremental production of approximately 2,140 barrels oil per day. Production is expected to be continuously optimized as water cut increases from the maturing waterflood at Costayaco. Potential well workovers were identified for the third quarter of 2016 with an estimated investment of $5.7 million and expected production gain of approximately 2,000 bopd. Workovers are booked as operating expenses.

During a workover of the Costayaco-1 well in the first week of August 2016, a 10-foot interval of the N-Sand was perforated which naturally flowed at an average test rate over a 21 hour time period of 364 bopd of 24 degree API oil with an average watercut of 5.3% through a fully opened 2-inch wellhead choke at an average tubing head pressure of 40 psi. After this encouraging well test, Gran Tierra's technical team is preparing a development plan to further assess the N-Sand's production potential in Costayaco.

Facility work has also progressed in the Costayaco field with the gas-to-power project being commissioned to generate electricity in second quarter 2016. Operating cost reductions of $1.6 million per year are expected from this project, as Gran Tierra utilizes the Company's associated natural gas production to generate its own power.

The water injection system for CYC-23i injection well was also finished in the second quarter. The well, which has been producing oil since early 2016, is planned to be converted to an injector in the fourth quarter of this year to increase the water injection into the field.

Preliminary laboratory screening has demonstrated that Costayaco is potentially a favorable target for chemical enhanced oil recovery and in particular alkaline surfactant polymer flooding. A laboratory study has been completed to evaluate and design a high performance CEOR process suitable for implementation in both the T Sand of the Villeta formation and the Caballos Formation sands. Further analysis is required before considering a potential pilot project.

Moqueta

A high resolution full field history match was completed for Moqueta field using numerical three dimensional reservoir simulation. This history matched model and its predictions are currently guiding production forecasting and being utilized by Gran Tierra's operations team to optimize water injection, pump operations, and zonal production. The model is enabling us to mitigate operational risks with a focused strategy to efficiently target undeveloped reserves in the future.

Artificial lift was also optimized in 3 wells, which resulted in estimated incremental production of 890 bopd in second quarter 2016. Production is expected to be continuously optimized as water cut increases from the Moqueta waterflood.

Potential well workovers and stimulations were identified for the third and fourth quarters of 2016, with an estimated investment of $4.3 million and expected production gain of approximately 1,700 bopd.

In the second quarter, electric wireline logs on Moqueta-23 identified an attractive pay interval in the U Sand formation of the Moqueta North Block. The U Sand found in Moqueta-23 appears to be the highest quality U Sand rock in the area with porosities reaching 14% and continuous pay thickness of 48 feet. This interval is planned to be stimulated and tested in September 2016.

Similar to Costayaco, a preliminary screening has demonstrated that the Moqueta field is also a potentially favorable target for CEOR and in particular ASP flooding.

Other Highlights in Colombia

Putumayo 7 ("PUT-7"; Gran Tierra 100% WI and Operator)

Gran Tierra has been assigned operatorship of the PUT-7 block by the ANH after the consolidating acquisitions of PTA and PGC which results in Gran Tierra owning a 100% WI. Both acquisitions closed in January 2016. Gran Tierra has completed the archaeological and biological screenings, and lease construction for the Cumplidor exploration/appraisal well is proceeding. The project is on schedule and Cumplidor-1 is expected to spud in the third quarter 2016. The drilling of the Alpha-1 exploration well is expected to immediately follow Cumplidor-1 from the same pad. A contingent third well (Cumplidor-3) may also be drilled from this same exploration/appraisal pad.

These wells will be the first to test the basin-wide N sands exploration play in PUT-7, which the Company believes is prospective and expects to lead to long term reserve and production growth. Additional wells in the Putumayo Basin continue to be progressed in the licensing process.

Chaza Block/Costayaco Exploration

Preparation is underway to drill an exploration well at Guriyaco-1 from the existing Costayaco multi-well pad to a total depth of approximately 9,800 feet. This well is expected to evaluate the productivity of the Caballos, T and U sands in a separate structure from the main Costayaco field. The well is expected to spud in late third quarter 2016.

Llanos Basin (El Porton Block; Gran Tierra 100% WI and Operator)

The planned Crypto-1 exploration well is expected to target a Llanos Basin structure with multi-zone oil potential. The access has been secured and civil works are expected to be initiated during third quarter 2016. The well is planned to be spud in the fourth quarter 2016.

Llanos Basin (Gran Tierra 45% WI, non-operated)

In the Llanos Basin during the second quarter 2016, Gran Tierra approved a (non-operated) workover campaign in the Jilguero and Las Maracas fields. The program is expected to include the workovers of the Jilguero-3, Jilguero-4, Las Maracas-10, Las Maracas-12 and Las Maracas-15 wells. The campaign is expected to result in incremental WI production of approximately 300-400 bopd for Gran Tierra.

Suroriente Block (Gran Tierra 15.8% WI, non-operated)

In the Suroriente block, Gran Tierra approved a (non-operated) workover campaign at the Cohembi and Quinde fields. The pump replacements in 3 wells are expected to add 200-250 bopd of WI incremental production. Gran Tierra is encouraging the operator to consider several other low-risk workovers during the third quarter 2016.

Sinu-San Jacinto Basin (Sinu-1 Block - 60% WI, operated; Sinu-3 Block - 51% WI, operated)

The program has been initiated to conduct 281 kilometers of two dimensional seismic over these 2 blocks. This seismic program is expected to provide additional information for assessment of leads and prospects on these blocks.

Cost reduction

Gran Tierra continued cost-cutting measures in the second quarter 2016. Negotiations for new contracts to provide drilling and workover rigs, directional and fluid services, stimulation services, air transport, helicopter services, goods and tubular transportation services, fuels and lubricants were successful in reducing operating and future capital costs. In addition, optimizing operations such as road construction and maintenance, location and camp maintenance, rental equipment, special services, catering and logistics have all contributed to cost reductions. Second quarter 2016 operating expenses of $8.70/BOE were down 33% from one year ago.

Drilling Efficiencies

In the second quarter 2016, Gran Tierra drilled one development well (Moqueta-22D) in the Moqueta field. Moqueta-22D was drilled with high geological and operational complexity but the drilling team still managed to reduce the cost per foot by 20% compared to previous wells drilled in first quarter 2016 (Moqueta-20D, Moqueta-23D).